Wall St. and Business Wednesdays: Black Lawsuits Cause Toyota To Back New Loan Disclosures
by Lee Hawkins, Jr.

Toyota Motor Corp.'s U.S. consumer finance unit and a national trade group that represents more than 20,000 car dealers say they support more clearly disclosing to consumers that the finance charges on auto loans can be marked up by dealers and are negotiable.

The action from the National Auto Dealers Association and Toyota Financial Services comes as nearly a dozen automotive financing companies are fighting lawsuits from African-Americans who allege that the policies harm black car buyers. The lawsuits allege that dealers tend to "mark up" loans more frequently and aggressively with blacks than with whites. Ford Credit and General Motors Acceptance Corp., the two largest auto lenders in the country, are among the dozen lenders that have been targeted since 1998 by bias suits on this issue. Dealers haven't been named in the suits.

The trade group, known as NADA, has sent out notices to its members stating that it supports the idea of additional disclosures.

Toyota Financial Services, the finance arm of the Japanese car maker, said it is in the process of inserting disclosure into its loan contracts. "We do support further disclosures and we are changing our contracts," said Cheryl Burnett, a spokeswoman for Toyota Financial. "I believe the industry is also moving in that direction and they are being changed as reprints are made."

Ford Credit, a unit of Ford Motor Co., and other auto lenders say they are considering similar changes, a reality that could soon ripple across the automotive financing industry.

Creditworthiness as Guide

At issue is exactly how many percentage points dealers should be able to tack on to the annual percentage rate that auto companies offer to dealers based on creditworthiness. It is currently legal in most states for dealers to inflate the annual percentage rate without disclosing to the consumer that the rate is negotiable.

"We told dealers that NADA supports disclosure of the fact that the finance rate may be negotiable with the dealer and that the dealer may retain a portion of the charges for arranging financing," said NADA spokesman David Hyatt.

The industry's consideration of a change comes almost two years after Nissan Motor Corp.'s finance arm agreed to disclose that interest charges on car loans "may be negotiable," and to place a three-percentage-point cap on the amount dealers can "mark up" the rates. Amid the legal pressures, a discussion has brewed within auto-finance companies about whether to also provide more disclosures in lending contracts. In addition, several major auto-financing companies have placed a three-percentage-point cap on interest rate markups by dealers. But Rev. Jesse Jackson's Rainbow PUSH Coalition and a string of consumer groups have been urging companies to lower the caps even further.

"Whatever price, it should be disclosed and listed," Rev. Jackson said. "All the car companies should agree to lowering or eliminating markup." In recent months, Rev. Jackson's group has placed pressure on GMAC and other automotive companies to change their policies. GMAC has responded mainly by sponsoring financial literacy campaigns. It also recently contributed $50,000 to Rainbow PUSH's Wall Street Project, which has among its goals financial literacy for African-Americans.

GMAC Trial Is Scheduled

GMAC, the financing arm of General MotorsCorp., is scheduled to go to trial a week from Tuesday to defend itself against a lawsuit filed by African-Americans who contend that its auto-lending policies harm black car buyers. GMAC said earlier this month that it has reached a oral agreement with the plaintiffs in that case, but has yet to finalize a deal. The company, which had been expected to reach a deal last week, has declined to discuss the items being negotiated or whether more disclosures would be part of the potential settlement.

A spokesman for Ford Credit, which could be the next target pursued in the lawsuits brought by Nashville lawyers Clinton Watkins, Wyman Gilmore Jr., and Michael Terry, said the company is studying the issue.

"Ford Credit has looked at the issue of disclosure language and we're considering that," said Dan Jarvis, a spokesman for Ford Credit. He emphasized that the company "absolutely does not discriminate on ethnicity because we don't know the race of a customer in the approval process."

The NADA's Mr. Hyatt said the group "getting the word out to all members" about its push for more disclosures. It is not, however, calling for further caps on interest-rate markups.

Lee Hawkins Jr. is a staff reporter of The Wall St. Journal and can be contaced via e-mail at : lee.hawkins@wsj.com